European startup funding to be halved to $42B by 2023, Atomico says

The decline in the technology sector – dragged by inflation, higher interest rates and geopolitical events – continues, and one of the most severely affected areas is VC funding for startups, especially already those outside the US According to VC firm Atomico, companies in Europe are on track to raise just $42 billion this year – less than half of the $85 billion the region is set to raise by 2022.

The numbers are from Atomico’s big report on state of European techwhich it publishes annually.

It also found that startups in the region raised less at each stage of funding from Seed to Series C (and beyond), with later-stage and larger companies feeling a particular pinch: 7 only “unicorns” (startups with more value. than $1 billion) are scheduled to emerge this year in Europe, compared to 48 in 2022 and 108 in 2021.

But there is a silver lining to the story. While the total amount of investment has certainly decreased in the last two years, Atomico’s theory is that 2021 and 2022 are outliers in terms of activity – a consequence of lower interest rates, an influx of use of technology during the peak of the Covid-19 pandemic, and a hidden amount of funding by investors – which raises significantly from LPs who want to reap large returns from a passionate industry – which needs to be deployed.

In other words, taking two years out of the mix, it looks like the numbers are following a slower, and perhaps healthier, upward growth curve.

Another positive sign is that the total value of the European tech ecosystem – that is, the combined equity value of all public and private tech companies in Europe – returned to the 2021 record of $ 3 trillion after falling to $400 billion in value by 2022. That’s thanks to a steady stream of new startups raising money in offset rounds, with most of the fundraising being done as flat rounds or up rounds.

“This change in the value of the ecosystem is also supported by the continuous influx of new companies starting and raising private capital for the first time, as well as the fact that, despite a large increase in the number of are down rounds, the majority of subsequent capital deployments in the ecosystem are through flat rounds or up rounds,” the report’s authors wrote.

Atomico bases its numbers on surveys it runs of startups and investors, and supplements that with data from third-party sources like Dealroom, CrunchBase and others.

Some of the other notable points from the report:

“Cross investors” crossed Europe. Atomico noted that so-called crossover investors — those who invest in private and public technology companies (Tiger Global is a well-known example) — have all but disappeared after driving some of the biggest deals in recent years. In 2021, there will be almost 100 mega-rounds in which these investors have led or participated in Europe. 2022 begins to see a slowdown in that pace. This year, fearing the poor performance of public and private tech companies, these crossover players made only four investments in the region.

Their absence also affects the overall picture for the nine-figure rounds. Atomico noted that the first nine months of 2023 saw only 36 rounds of $100 million or more, compared to hundreds in the previous two years. Especially these phases do not follow the same upward curve as the other numbers: there are 55 $100+ rounds in 2020.

Planting the Seed. Startups in almost every stage are up on average in down rounds, Atomico data shows. In general, the later the stage, the greater the reduction in value. Here is the picture for the Series C rounds:

Overall, median valuations for European startups remain significantly lower than their US counterparts – typically between 30% and 60% lower.

“This shift back to the longer-term average in Europe mirrors what is happening in the US,” Atomico wrote. In fact, between the US and Europe, funding has decreased in almost every investment phase between Seed and Series C. The only exception is the US Seed phase, which continues to increase, albeit at a slower rate. (Median Seed rounds in the US this year, Atomico said, was $11.5 million, while the European median figure was half that amount: $5.7 million.)

AI is not dominating investment in Europe. Although the focus of today’s tech zeitgeist is definitely on artificial intelligence, when it comes to what features are driving the actual fund raising today, if you jump on that bandwagon, you might miss the real performance. Atomico says that its figures indicate that climate technology – and the wider area in which it is located, Carbon and Energy, will account for 27% of all capital invested in technology in Europe in 2023.

That’s more than double what was invested in this area in 2023, and it’s doing better than some of the other tech areas that are traditionally big in the region.

“Carbon & Energy outperformed Finance & Insurance & Software as the single largest sector by raising capital,” the authors’ report said. “This not only represents a dramatic increase in the scale of capital invested behind the green transition, but also a clear slowdown in the amount of investment in fintech since the peak of the market.”

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